ECO 1304 Chapter Notes - Chapter 9: Marginal Revenue, Natural Monopoly, Demand Curve

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19 Dec 2016

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A monopoly is a market with only one seller of a product that has no close substitute. There are natural and legal barriers to entry that prevent competition. They are (cid:862)price makers(cid:863) sets the price of its product so as to maximize profit. For a monopoly to persist, other firms must be barred from entering the industry. The monopolist cannot set both price and quantity. If the monopolist expands output, price will fall. If the monopolist wants to expand output, it must accept a lower price. The marginal revenue curve for a monopolist lies below the demand curve. The marginal revenue of a monopolist is always less than the price. When price falls, tr rises, mr is positive. When price falls, tr falls, mr is negative. A monopolist will never knowingly operate in the inelastic portion of its demand curve. Increased output would lead to lower tr and higher total cost.

Related Questions

(TCO 3) The nondiscriminating pure monopolist must decrease price on all units of a product sold in order to sell more units. This explains why (Points : 3)

there are barriers to entry in pure monopoly.
a monopoly has a perfectly elastic demand curve.
marginal revenue is less than average revenue.
total revenues are greater than total costs at the profit-maximizing level of output.

emeraldlizard707

32) Marginal revenue is less than price for a single-price monopolist because the A) firm's output decisions do not affect the selling price. B) firm must lower its price for all units if it wants to sell more of the product. C) monopolist charges a price higher than the unit production cost. D) monopolist must worry about how its price setting will lead to entry by other firms. E) monopolist has achieved economies of scale.

Suppose a monopolist faces a demand curve for its output of P = 300âQ. This means that the marginal revenue curve of the monopolist is M R = 300 â 2Q. Assume that the marginal cost of production is constant and equal to $40.

a) Write down an expression for the monopolists profit, as a function of the quantity of output it produces.

b) If the monopolist must charge the same price for all units of output that it sells (that is, if the monopolist is a single price monopolist), what level of output will maximise the monopolists profit? What price will the monopolist charge? What is its level of profit?

c) If this were a competitive market instead of a monopoly, what level of output would be produced and what price would be charged? What is the level of profit for firms if it were perfectly competitive?

d) Draw a diagram of demand, marginal revenue, and marginal cost that illustrates your answer to part b). From this work out consumer surplus and producer surplus.

e) Draw the same diagram but for your answer to c), the case of the competitive market. From this work out consumer surplus and producer surplus. How much deadweight loss is there from the monopoly? Why?

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ECO 1304 Chapter Notes - Chapter 9: Marginal Revenue, Natural Monopoly, Demand Curve

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